EIUG – Wheeling Methodologies

Wheeling methodologies with advantages and disadvantages of each method

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SUMMARY OF TRANSMISSION PRICING METHODS

Historic cost

Future cost

Nodal pricing

Postage Stamp

Contract paths

MW-km (distance)

MW-km (load flow)

Short run (SRIC & SRMC)

Long run (LRIC & LRMC)

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HISTORIC COSTS – POSTAGE STAMP

• Method• Costs shared equally regardless of location or utilisation. • An enhancement to the methodology is to apply different postage stamp charges

to different zones or areas

• Advantages• Full historic cost recovery encouraging efficient level of investment• Simple, stable charges• An improved ability to signals the costs of decisions of individuals

• Disadvantages• Does not take into account of utilisation of system, lack of incentive for system

users• Potentially discriminates between users • Low economic efficiency as it may lead to investments out of contract path as

well.

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HISTORIC COSTS – CONTRACT PATHS

• Method• Costs based on the specific path agreed for an individual wheeling transaction

• Advantages• Full historic cost recovery encouraging efficient level of investment• Simple, stable charges• An improved ability to signals the costs of decisions of individuals

• Disadvantages• Does not take into account of utilisation of system, lack of incentive for system

users• Potentially discriminates between users • Low economic efficiency as it may lead to investments out of contract path as

well• Administratively complex when multiple wheeling transactions are facilitated

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HISTORIC COSTS: MW-KM (DISTANCE BASED)

• Method• Distance travelled by the energy in a specific transaction (MW-km)

in relation to the total MW-km in the system

• Advantages• An improved version of postage stamp and contract path

approaches• Disadvantages

• Does not take into account of system costs and actual operation in the system

• Does not provide accurate economic signals to users

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HISTORIC COSTS: MW-KM (LOAD FLOW BASED)

• Method• Uses power flow model, hence reflects to a better extent, the actual use of

the system.• Transmission prices reflect the proportion of system use.

• Advantages• An improved version of postage stamp and contract path approaches. • Simple, clear, stable charges• System congestion is starting to be taken into account

• Disadvantages• As power flows are less than circuit capacity fails to recover full capital

costs.• Does not provide correct economic signals to users for future investments.• Results can fluctuate significantly following the introduction of new

generators and loads that have an impact on load flows

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FORWARD LOOKING – SHORT RUN PRICING

• SRIC (Short Run Incremental Cost)• Short run incremental operating cost• Uses a model of optimal power flows

• SRMC (Short Run Marginal Cost)• The marginal cost of extra use of transmission system• The marginal operating cost of an extra MW

• Disadvantages of short run methods• Difficult to estimate the operating cost of a single transaction while

multiple transactions are occurring simultaneously• Requires future forecasting , the accuracy of which can become

decreasingly accurate• Data volatility in the short run can result in under investment• Additional disadvantages of SRMC method

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FORWARD LOOKING – LONG RUN PRICING

• LRIC and LRMC (Long Run Incremental Cost and Long Run Marginal Cost)• Both take into account of investment cost, in addition to incremental

operating cost • Full long term costs including new investments• More stable prices compared to short run

• Disadvantages of long run methods• Difficult to estimate the operating cost of a single transaction while

multiple transactions are occurring simultaneously• Double counting of investment requirements

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NODAL

• Node is typically a substation• Generators and loads connecting at a node will have

the same energy price, energy price at the node will depend on congestion on the transmission lines • Each node has its transmission and losses charge for

loads and generators depending on flow on lines towards or out of substation, these are the marginal costs and depend on the whole network

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LOCATIONAL MARGINAL PRICE (LMP)

• A Locational Marginal Price is the cost of serving the next MW of load at a given location (node)• LMPs are formulated using a security constrained dispatch

and the marginal costs of supply are based upon participant offers and bids• LMP consists of three components:

LMP Marginal Cost of Generation

Marginal Cost of Losses

Marginal Cost of

Transmission Congestion

= + +

Source IMO Ontario www.theimo.com

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NODAL PRICING

• Method• Nodal charges vary at nodes depending on marginal cost of losses and

congestion at that node

• Advantages• Economically ideal transmission prices• Ensures optimal dispatch thus maximizing allocative and dynamic

efficiency• Disadvantages

• Possible under recovery of fixed costs due to marginal pricing• Requires constant real time information about loads, generators, bids

and condition of the equipment• Potential Instability and complexity in methodology implementation

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SUMMARY

• The most prevalent wheeling charge methdologies are:• Postage stamp• MW-km• Load flow• Nodal

• Forward looking methodologies are economically and theoretically sound but suffer from revenue instability

APPROPRIATENESS OF METHODOLOGY TO SOUTH AFRICA

Attributes Postage Stamp per Zone (Eskom/NERSA)

MW KM Load flow based Nodal

Cost reflectiveness

Very little discrimination on location – encourages development in rural areas

Transaction based and cannot be easily applied to all consumers. Two methods required

Transaction based and cannot be easily applied to all consumers. Two methods required

Actual flow based

Prices Prices are stable Prices are stable Prices are unpredictable in long term

Prices are based on marginal costs and vary dramatically

Cost recovery Full recovery of transmission costs

Full recovery of transmission costs

Off sets required to fully recover costs

Off sets required to fully recover costs

Transparency Transparent and Non discriminatory between customers

Transparent but potential discriminatory between customers

Transparent but potential discriminatory between customers

Transparent

Differentiation Voltage level discrimination is cost reflective

Not applicable Not applicable Complex to explain and implement

Losses Losses vary with periods based on pre-determined loss factors

Proportional to distance Defined by load flow analysis Losses marginally calculated

Cost allocationconsistency

Generation and load charges are based on different zones and methodologies

Consistent Consistent Consistent

Complexity Simple Complex Complex Very complex

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OVERALL OBSERVATIONS & RECOMMENDATIONS

• Eskom’s approach represents a fair balance between cost reflectivity and complexity. • However, there are potential areas for improvement

including:• Subsidies represent a large proportion of perceived

wheeling costs resulting pricing anomalies • Losses rebate limitation for distributor generators should

be removed, and• Separate methodologies (and zone definitions) between

generators and loads cause further distortions and pricing anomalies